Macro Investing Masterclass (John Burbank converses with Kyle Bass)

John Burbank III, founder of Passport Capital, is a well-known macro investor based out of San Francisco. He grew Passport from around $800,000 to an investment firm managing north of $3 billion at its height. He was also one of the few money managers who anticipated the subprime mortgage crisis in 2005 and actually cashed in on it for himself and his clients.

There isn’t much material publicly available on Burbank and his firm. Fortunately, in a podcast at Real Vision, another well-known hedge fund manager, Kyle Bass, interviewed Burbank a few years ago, and it is absolutely a treasure in terms of understanding the thought philosophy and framework of a successful macro practitioner.

The depth of the conversation between Bass and Burbank was astonishing, and there were many takeaways on issues such as developing conviction, portfolio management, position sizing, and tail risks.

If you’re serious about taking your investing to the next level, take some time to listen to it:

Below are some great takeaways from the podcast that I’ve categorised:

Things that have never happened before tend to be the best profit making opportunities.

Most investors think in a ‘reversion to the mean’ way. ‘They look backwards to extrapolate forward… That’s what happens 90% of the time but the signal events, the big events that affect other prices, are things that were not a model, and they typically have never happened before.’

No matter how good an idea, there’s an inherent level of uncertainty that can’t be modeled. ‘You could only understand the risk/reward of the fertility of the potential of the direction/magnitude.’ Price is therefore not a proper discounting mechanism as it is merely a reflection of current liquidity – ‘price is a liar’

The issue will be sizing according to what you think may happen relative to some form of duration (risk/reward of what could happen). No matter how right you are, if there are too many bets, you’re increasing your risk with short-duration capital.

‘If you have some sort of edge relative to current liquidity and the right duration and the right holding ability, you have an exceptional chance to make money. You also have an exceptional chance to lose money because liquidity can go completely against you.’

Burbank tries to develop a sense of how the world is changing all the time, and focuses on trying to understand what the probability of the world being different than what the market expects is going to be… ‘how it would be and when it would be… and what are the triggers.’

When it comes to playing the ‘Knock-On’ effects: aside from understanding the probability of outcomes, it’s also key to understand how it flows through asset classes and how it develops over time.

The further away from the primary effects of the observed/anticipated event, the less crowded those areas would be when it comes to taking contrarian bets there.